# What is impact cost?

**URL:** https://tradingqna.com/t/what-is-impact-cost/8239
**Category:** General
**Created:** [November 29, 2016, 5:35pm UTC](https://tradingqna.com/t/what-is-impact-cost/8239 "2016-11-29T17:35:44Z")
**Posts on this page:** 1
**Showing post:** 2

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### Author: ![BharatW](https://tradingqna.com/user_avatar/tradingqna.com/bharatw/32/3886_2.png) [@BharatW](https://tradingqna.com/u/BharatW)
#### Post date: [November 29, 2016, 6:41pm UTC](https://tradingqna.com/t/what-is-impact-cost/8239/2 "2016-11-29T18:41:57Z")

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Hello,

When large orders are executed without noticable movement in stock prices, one can say the stock **market is liquid.**

Lets consider the snap quote of a stock at a point in time:  
  
 ![](https://tradingqna.com/uploads/default/original/2X/3/35b00dc802ac196e10106000e2f6e21a218158e0.jpeg)

The snap quote here consists of 4 best buy and 4 best sell orders.

Here the&nbsp; **bid-ask spread** (difference between best buy and best sell orders) is 0.50.

Buyers can execute their orders at best seller prices and sellers can execute their orders at best buyer prices.  
Here, a buy market order for 100 shares will get executed at 4.50 and a sell market order will get executed at 4.

Now, if a person buys 100 shares and immediately sells it, he will take a loss equal to the bid-ask spread into the quantity he holds.

In this case, his loss would be 0.05x100 = Rs.50.&nbsp;

This is regarded as the **transaction cost** which the market charges for the priviledge of trading.

Now lets **increase the quantity** and make it 3000 shares to transact.

If a person buys 3000 shares and immediately sells it,

The buy order will hit the following sell orders:  
  
 ![](https://tradingqna.com/uploads/default/original/2X/1/197784c3343f786e53030f445098fdcc65c2715d.png)  
  
&nbsp;

And the sell order will hit the following buy orders:  
  
 ![](https://tradingqna.com/uploads/default/original/2X/2/20f7ae294b5a98f31ca887e42069f0348be89d48.png)

The transaction cost increases with increase in quantity. The bid-ask spread reflects transaction costs only for smaller quantities.

Lets consider what we now call Impact cost:

**Lets define the ideal trading price as the average of the best bid and ask prices.**  
In an infinitely liquid market, both buy and sell orders should execute at this ideal price.

In the following example:  
  
 ![](https://tradingqna.com/uploads/default/original/2X/f/fbdc1b18eb9ccc7b4c1af3dc74ad41f7d4f54acb.jpeg)

To buy 1500 shares, Ideal Price = (9.8+9.9)/2 = Rs.9.85

Actual buy price = [(1000\*9.9)+(500\*10)]/1500 = Rs.9.93.  
  
**This difference is the Impact Cost.**

Impact cost for buying 1500 shares = 9.93-9.85 = 0.08.

Impact cost in % = [(9.93-9.85)/9.85]\*100 = 0.84%

Cheers!

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